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CFA® Level I · Economics · free lesson
Introduction to Geopolitics
Sanctions, export controls, tariffs and attacks on shipping lanes now move markets as much as interest rates do. This module gives a framework for thinking about geopolitics: who the actors are and why countries cooperate, how globalization and nationalism shape four broad geopolitical archetypes, which tools governments use against each other, how to classify and assess geopolitical risk, and how to bring that risk into investment analysis.
What you will learn
1. Describe geopolitics in terms of state and non-state actors and the degree of cooperation between countries, and explain the motivations and factors that drive countries to cooperate.
- State actors hold authority over a nation's resources; non-state actors (companies, NGOs, institutions) influence without it.
- Cooperation is a spectrum and can differ by issue (trade, security, technology).
- Motivations: national security, economic interests, soft power and standardization.
- Factors: resource endowment, geography, internal politics, culture and history.
- Resource-poor, trade-dependent countries usually have stronger incentives to cooperate.
2. Describe globalization and its opposite, nationalism, explain their benefits and costs, and classify countries into the geopolitical archetypes of autarky, hegemony, bilateralism and multilateralism.
- Globalization: integration through flows of goods, services, capital, technology and people.
- Benefits: specialization, scale, lower prices, technology diffusion; costs: inequality, dependence, fragile supply chains.
- Archetypes combine cooperation (or not) with globalization (or nationalism).
- Autarky = non-cooperative and nationalist; hegemony = non-cooperative but globally integrated.
- Multilateralism = cooperative and global; bilateralism = cooperation pursued partner by partner.
3. Describe the national security, economic and financial tools of geopolitics, distinguishing cooperative from non-cooperative uses, and explain their effects on regions and economies.
- National security tools: armed conflict, espionage and cyber operations (non-cooperative); alliances and joint exercises (cooperative).
- Economic tools: trade agreements (cooperative); unilateral tariffs, export bans, nationalization (non-cooperative).
- Financial tools: reserve currency status, capital and exchange controls, investment screening, sanctions.
- Tools are often combined and have spillover costs for the countries using them.
- Heavy use of sanctions can encourage targets to build alternative systems.
4. Describe event, exogenous and thematic geopolitical risks and assess a geopolitical risk by its likelihood, velocity and the size and nature of its impact.
- Event risk: known date, uncertain outcome (elections, deadlines).
- Exogenous risk: sudden and unanticipated (invasions, attacks, coups).
- Thematic risk: known, slowly evolving concerns (climate, cyber, great-power rivalry).
- Assess likelihood, velocity and impact (size, breadth, duration).
- Signposts are observable indicators that a risk is becoming more or less likely.
5. Explain how geopolitical risk affects investments and describe how analysts use scenario analysis, signposts and portfolio adjustments to incorporate it, including probability-weighted outcomes.
- Channels: risk premiums, commodities, supply chains, sector effects, policy responses.
- Scenario analysis: base case, escalation, de-escalation; attach probabilities and returns.
- Expected return = sum of probability x scenario return; also examine the tail outcome.
- Signposts show which scenario is becoming more likely.
- Avoid overreacting to short-lived shocks; build slow-moving thematic risks into strategic analysis.
Module at a glance
- State actors hold authority over national resources; companies and NGOs are non-state actors.
- Countries cooperate for security, economic access, soft power and common standards; resources and geography shape the incentive.
- Archetypes: autarky, hegemony, bilateralism and multilateralism, defined by cooperation and globalization.
- Fragmentation raises costs and inflation but may improve supply security.
- Tools: national security, economic and financial, each used cooperatively or not.
- Event risk has a known date, exogenous risk is sudden, thematic risk evolves slowly.
- Assess risks by likelihood, velocity and impact; monitor signposts.
- Use scenario analysis and probability-weighted returns, but always examine the tail outcome.
This free module has 5 lessons, 13 practice questions with full explanations.